Chapter 2 - Business Combinations Flashcards
(32 cards)
Acquisition Method
- Used to report all business combinations under US GAAP
- Requires careful identification and valuation of the assets acquired and liabilities assumed
Assets and liabilities of the acquired company are measured at:
fair value on the acquisition date
Acquisition date
The date the acquiring company takes control of the acquired company.
Usually the date consideration is paid
Why is it necessary to identify the acquiring company?
Acquired company’s assets and liabilities are revalued to fair value at the date of acquisition
Acquiring company’s assets and liabilities remain at book value
When acquisition cost > FV of net assets acquired
record goodwill
When acquisition cost
record gain on bargain purchase
Two criteria for separate recognition as an identifiable intangible by acquiring entity
Intangible arises from contractual or other legal rights, or
Intangible is separable: can be separated or divided from the acquired entity and sold, rented, licensed, or otherwise transferred
5 categories of identifiable intangible assets
- Contract-based
- Marketing related
- Customer-related
- Technology-based
- Artistic-based
Customer-related IIAs
Customer lists
Order backlogs
Customer contracts
Technology-based IIAs
Patent rights
Computer software
Databases
Trade secrets
Artistic-based IIAs
TV programs Motion pictures and videos Recordings Books and photographs Advertising jingles
Contract-based IIAs
Lease, franchise and licensing agreements Construction permits Employment contracts Broadcast rights Mineral rights
Marketing-related IIAs
Brand names Trademarks Internet domain names Newspaper mastheads Non-competition agreements
When no equity interests are exchanged
acquiring company distributes cash or other assets and/or incurs liabilities
when the business combination involves an equity exchange
Possible characteristics of acquiring company:
Entity that issues the equity interests
Entity that is larger
Owners have larger voting interest
Prior owners constitute a large minority (
Valuation of identifiable intangibles
Measurement guidelines of ASC Topic 820
Fair value hierarchy
Level 1: Quoted prices in an active market
Level 2: Quoted prices for similar assets, adjusted for attributes of acquired assets
Level 3: Valuation based on unobservable estimated attributes:
Discounted present value
Earnings and book value multiples
Intangibles Not Meeting Criteria as Identifiable Intangibles
Consideration paid reflects these intangibles Consideration paid > fair value of identifiable net assets Examples: Assembled workforce Potential contracts Long-standing customer relationships Favorable locations Business reputation
Goodwill
exists if the consideration paid exceeds the total fair value of the net identifiable assets acquired.
Excess consideration paid occurs due to value attributed to intangible assets not meeting criteria for capitalization as identifiable intangible assets
Amount is capitalized as goodwill, an intangible asset
Measurement of Acquisition Cost
Must be measured at fair value at the acquisition date
Acquisition cost includes
- Cash or other assets transferred to the former owners by the acquirer
- Liabilities incurred by the acquirer and owed to the former owners of the acquiree
- Stock issued by the acquirer to the former owners of the acquiree
Contingent consideration exists when
the acquirer agrees to make additional payments to the former owners of the acquiree if certain events occur or conditions are met
Contingent consideration
- Adds to acquisition cost
- Must be reported at date of acquisition
Requires good faith estimates of Probability, and
Timing - Based on present value of the expected payment
What is a Business Combination?
Occurs when one company obtains control over another company Terms used: Merger Acquisition Takeover
Business Strategies Achieved Through Acquisitions
Control a source of supply
Acquire new technology, production or distribution facilities
Expand into new geographic markets, acquire new customers
Diversify into new lines of business
